Answered step by step
Verified Expert Solution
Question
1 Approved Answer
I need help solving i* for: (P/A,i*,5) = 3.125 please solve it by hand EXAMPLE 177 A fiber optics manufacturing company operating in Hong Kong
I need help solving i* for:
(P/A,i*,5) = 3.125
please solve it by hand
EXAMPLE 177 A fiber optics manufacturing company operating in Hong Kong has spent $50.000 for a 5-vear-life machine that has a projected $20.000 annual NOI and annual depreciation of $10,000 for years 1 through 5. The company has a Te of 40%. (a) Determine the after-tax rate of return. (b) Approximate the before-tax return and compare it with the actual before-tax ROR Solution a) The CFAT in year 0 is S-50.000. For years 1 through 5, there is no capital purchase or sale. TI NOI D 20,000 10,000 $10,000 CFAT = CFBT-taxes = 20.000-4000-$ 16,000 so NOI CFBT. (See Equations [ 17.1 ] and [ 17.9) Determine CFA Taxes = Te (TI) = 0.4( 10,000) = $4000 Since the CFAT for years 1 through 5 has the same value, use the P/A factor in Equa- tion [17.19]. 0 =-50,000 + 16,000(P/A,i*5) (P/A ,i+5) = 3.125 Solution gives i*-18.03% as the after-tax rate of return. (b) Use Equation [17.22] for the before-tax return estimate. 0.1803=0.3005 1- 0.40 (30.05%) Before-tax ROR = ) using CFBT = $20,000 for 5 years is 28.65% from the relation 0-50,00020,000(P/A,j*,5) The actual before-tax The tax effect will be slightly overestimated if a MARR of 30.05% is used in a before-taxStep by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started